E2. Feldblum: Computing Taxable Income for the P&C Insurance Co. Flashcards Preview

TIA Exam 6 > E2. Feldblum: Computing Taxable Income for the P&C Insurance Co. > Flashcards

Flashcards in E2. Feldblum: Computing Taxable Income for the P&C Insurance Co. Deck (20):
1

Economic income equation

Economic income = PV (future premiums) - PV(future losses)

2

How is the discount rate to be used in tax calculated

For each AY, the discount rate is the 60mnth moving average of the "federal mid-term rates", ending Dec 1 of the prior AY

3

Portion of Tax exempt income that is taxed due to proration provision

15%

4

Reason that tax calculations use Schedule P Part 1, instead of Part 3

-Part 3 contains only DCC, not AAO. Part 1 contains all LAE.
-Part 1 is audited, whereas Part 3 is not.
-Some actuarial methods rely on judgment to select paid LDFs. The IRS method does not involve judgment.

5

Equations to derive RTI from incurred losses according to direct and indirect methods

-Direct: Paid loss + change in discounted reserves
-Indirect: Statutory incurred loss - change in reserve discount.

6

Due to the DRD, what portion of dividends are tax exempt

-if the taxpayer owns less than 20% of the firm, 70%
-if the taxpayer owns between 20 and 80%, 80%
-if the taxpayer owns more than 80%, 100%

7

Equations to derive RTI from dividends according to direct and indirect methods.

-Direct: 40.5% of unaffiliated common stock dividends

-Indirect: Statutory income - 59.5% of dividends

8

Equations to derive RTI from bond income according to direct and indirect methods.

-Direct: 15% municipal bond income
-Indirect: Statutory income - 85% municipal bond income

9

AMTI equation:

AMTI = RTI + 0.75 Income that escapes taxation

10

Equations to derive RTI from revenue offset according to direct and indirect methods.

Direct: WP - 80% *Change in UEPR Indirect: Statutory EP + 20% *Change in UEPR

11

Factors that management need to consider when deciding portions of stocks versus bonds to hold:

-relative tax rates
-yield
-diversification
-asset liability management
-SAO
-Management dislike of erratic income

12

ARIT equation:

ARIT = RIT - prior year's minimum tax credit

13

Relationship between RTI and AMTI that would produce the optimal tax strategy:

AMTI = RTI*175%

14

Reasons municipal bonds often provide a higher after tax yield than corporate bonds of similar risk levels:

-Callability: most municipal bonds are callable
-Liquidity: Municipal bonds are less liquid.
-Tax legislation: The proration provision reduced the tax advantage of municipal bonds

15

Reduce taxable income?

Use company specific discounts if factors are closer to 1 because it imposes less discounts and higher incurred losses

16

Stat vs Tax incurred losses

Statutory: IL=paid losses + change in full value reserves

Tax: IL=paid loss + change in discounted reserves

17

Stat and Tax accounting loss occurrence

Tax: investment income on the assets backing the loss reserves offsets the amortization of the interest discount of the reserves

Statutory: earns positive investment income. No changes in reserves to offset this

18

Determining discounted rates

1. Undiscounted loss reserves
-from schedule P part 1

2. Discount rate promulgated each year by the treasury
-varies by AY

3. Loss payment pattern by LOB
-applies a CY payment pattern to an AY of loss reserves

19

Determination year

The "2" or the "7"

20

5 adjustments to stat income for taxable income.

-Remove tax exempt income
-add proration on tax exempt income
-adjust for change in discounting of loss reserves
-dividend received deductible: to avoid potential double taxation!